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Why More Stimulus is Inevitable Along With Rising Inflation & A Likely Devaluation of the Dollar

The COVID induced recession has had a severe impact on the economy with the poorer segments of the population bearing the brunt of the impact. Millions have lost jobs or seen their income significantly reduced. While the Government stepped up with over $3 Trillion in stimulus and support to small and large businesses, extending and supplementing unemployment benefits, the supplemental benefits ended last month. States have also stepped up asking utility companies to put a morotorium on payments for those who have lost their jobs. These morotorium's are also expiring in many states.

More Stimulus is Inevitable

It is estimated by the NEADA that electric and gas debts will exceed $24.3 billion by the end of 2020. In Indiana, for example, it is estimated that over 110,000 households are behind on their utility bills by over 120 days. In Wisconsin 3 in 10 households are behind on their bills. This is just the tip of the iceberg. A percentage of the very same households are behind on rent or mortgage payments. The impact on the health, security and safety of families who are impacted by this is serious. Likewise these sums will have a significant impact on the utlity companies themselves.

The latest National U.S Census shows that almost one-third of adults are reporting difficulty meeting their regular household expenses.

“You can’t really underestimate the burden of that debt on families,” said Khalil Shahyd, a senior policy advocate at the Natural Resources Defense Council. “It’s also going to have wider ramifications for our economy and our ability to recover from this crisis.”

In addition, many states, cities and municipalities are facing severe income shortfalls as revenue streams have shrunk in the pandemic. By the time you have accounted for all the key financial variables impacted by COVID, you have a national crisis that is touching every aspect of the amercian society except for the top 20% of households by income and assets.

And while the stock market has rallied back from its 30% crash earlier this year to close the gap on pre-COVID highs, this rally is being led by the big technology companies who are reaping the benefits of society having to adjust to an internet focused "work from - and order from - home economy". The beneficiaries of this rally is limited to participants in the markets.

More stimulus is critical to keep a large sector of american houselholds, cities, states, municpalities and businesses afloat. The only question is how much more stimulus is required?

Inflation and the Devaluation of the U.S dollar is all but inevitable. The only question is how much?

Record annual defecits in 2020 and overall US debt burden has reached a staggering $23 Trillion and counting. The latter coupled with a new inflationary adjusted fed policy along with close to zero interest rates through 2023, make inflation all but inevitable. The climate is excellent for owning hard assets such as Gold, Real Estate, Collectables and Art and any other asset that could be a hedge against inflation. It is also a great climate for anyone who owes U.S dollars over the mid to long term.

Unlimited money printing coupled with a zero interest rate fed policy increase the odds substantially for a devaluation of the U.S dollar. And, who might be the greatest beneficiary of such a devaluation. Why, the U.S governement of course. If you owe US dollars over the mid and long term and the value of these dollars erode, you effectively are paying back those same dollars for less, a lot less!

A former chairman of Morgan Stanley Asia, Stephen S. Roach, believes that the U.S dollar - which he believes is the most over-valued currency in the world - could depreciate by up to 35%. He sees 3 factors that could accelerate this:

1. The national net savings ratio is negative -1% in the second quarter of 2020 and shows a decline of 3.9% in the first quarter. Americans are saving less and this is going to continue until we are out of COVID and employment levels have returned. The huge unemployment numbers coupled with the ending of spplemental benefits last month is goign to extend this trend.

2. Record Annual and Overall Defecits are unsustainable. Policy makers no longer feel obligated to balance the books on a national, state and local city level.

3. The Fed’s shift in monetary policy of accomodating a degree of inflation along with zero interest rates through 2023 puts negative pressure on the dollar.

 

Key Takeaway

Likely devaluation in the US dollar will shift money out of the dollar into assets that can act a hedge.  Once the shift becomes noticeable, it will accellerate. How much will the U/S dollar depreciate is hard to say. Other countries are likewise having to print their way out of the same recessionary environments.

 

 

 

 

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Hawley Advisors
1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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